Some numbers: Hollande intends to lop €60bn off public spending over the five years of his mandate, €12bn a year on average. In the "forced march" he has instructed Prime Minister Ayrault to lead, the 2013 budget is supposed to present a 3% deficit. This is to be financed by €20bn increased taxes and €10bn in spending cuts. (Yes, only €10bn. That leaves €50bn in spending cuts to be spread over the remaining four years of the mandate). Sugaring the pill are tax increases more particularly aimed at rents and high incomes (including the iconic temporary 75% marginal income tax rate), and ring-fencing for the education budget (with a rise in the number of teachers).

Of course, this is a declaration of virtuous intent. No one really believes the budget deficit next year will be 3%. Not even the PS: the new secretary-general of the party, Harlem Désir, has already come out with comments that suggest it wouldn't really be a big deal if the target were not met. However, the adhesion to the German doctrine on government deficits is clear, and stated as an objective over the five years to come.

Competitiveness

The government ordered up a report on the competitiveness of French industry from Louis Gallois, former CEO of EADS. It reads like a smartly-written plea for business-friendly policies. Smart in that it mentions problems either without fully addressing them, or by hi-jacking them in support of a supply-side agenda. Problems that are not really addressed include the abandonment of manufacturing for services more than thirty years ago; the financialisation of the economy and its destructive effect on industrial strategy; the chronic lack, in France, of the medium-sized enterprises that are an exporting strength of Germany (Gallois's recommendations for the support of SMEs are pretty much ritual in France); and mercantilism: that many industrial horses have already bolted because the Asian door is wide open, or that Germany pursues a beggar-thy-neighbour policy within the Euro area (though the report, p.10, does mention that the low salaries paid in Germany in the services sector would not be admissible in France). The one proposal concerning the euro was that France should do everything to persuade its partners that the euro exchange rate should slide downwards -- in other words (though not stated thus by Gallois), one of the reasons for the difficulties of French industry is that the franc went into the euro too high ; but a lower exchange rate with other major currencies would not affect the situation within the Euro area, where France's lunch has been eaten by Germany, so this proposition still tacitly refuses to address the real problems of the single currency area. For an instance of hi-jacking: the fact that French companies (automobile in particular) have for long maintained their product range at the lower to middle end of the spectrum (while Germany's position is more up-market) is not pinpointed as a failing of private enterprise strategy, but as a problem in that it makes French exports more price-sensitive (entry to mid-level products are bought by people who need to watch the price), and hence (you got it) sensitive to labour costs.

What the media make of it is the usual soundbite-size: France needs "shock treatment". The "confidence shock" for example (here's what Gallois says, p20):

Yes, the state has to create an atmosphere of confidence in order to encourage investment (PPPs ahoy!). And, above all, the biggie for the media: the "competitiveness shock". You'll have guessed that it means reducing labour costs. That one works wonders, in that it creates "confidence" and "competitiveness" in one fell swoop. The focus of the Gallois report is on "reform" to halt "decline" -- and, as usual, "reform" means bringing down labour costs.

Reports of this kind are generally commissioned for their announcement-and-delay effect, and filed away in a drawer once delivered. It appears to me, in this case, that Louis Gallois has done what was expected of him in writing a manifesto for Hollande's five years. The report will be acted on.

"Tax wedge"

Spawned in the rancid entrails of some rightwing think tank and widely used by the OECD (did I hear someone ask what the difference was?), the term "tax wedge" is used to vilify employer contributions to social security (meaning, in the French case, national health insurance, pensions, unemployment insurance). Since these contributions are made to specific social security organisms, and are nominal, conferring personal rights to the employee and her/is family, these seem to me to be of a different nature from taxes. They enter, in fact, into the total cost of the position for the employer, which of course the employee has to earn -- and a fair share of them can be described as deferred salary.

Stepping back a little, it's also quite understandable for social security to be based on labour. At any time, social transfers towards inactive dependents (children, students, old people, disabled people, the unemployed) need to come from the active population and their earnings. However, the volume of these contributions in France is considerable (16.4% of GDP in 2010, greater than the Eurozone average), which can be pointed to as a contributory cause of high unemployment. The system was designed in the postwar years when a head of family could expect a lifetime job, and attempts to adapt it as conditions have changed have not been successfully accomplished. It's now more than twenty years since Michel Rocard introduced the CSG (General Social Contribution), a central government tax ring-fenced for social security, paid on income from work but also on capital gains, rents and pensions, at an approximate current rate of 8%. This is a flat tax ie not progressive. Raising yet more social security revenue through an increased CSG so as to lower payroll contributions by any significant amount would place a disproportionate burden on lower wage-earners and small savers.

Fiscal revolution

French economists Camille Landais, Thomas Piketty and Emmanuel Saez, authors of landmark studies on incomes, taxation, and social transfers (Piketty and Saez are known for their historical study of US income tax (pdf)), launched a movement in France for fiscal revolution (FR). Thomas Piketty, described in the media as "close to the PS", was involved in discussions on candidate Hollande's programme. The révolution fiscale sets out to remedy the major problems of the French tax and social contributions system: heavy payroll contributions discourage employment, attempts to alleviate that leave the social security (health, pensions) accounts in deficit; the system is not progressive because taxes are heavily skewed towards indirect taxation -- number one revenue, by far, comes from VAT, while the progressive income tax accounts for less than 6% of total taxes and contributions, and its "take" has slowly decreased over the past decades (company tax brings in half that percentage, and its "take" has decreased over the past ten years).

In fact, the flat-rate CSG brings in considerably more than the income tax. From the book Pour une révolution fiscale (Landais, Piketty, Saez):

The percentages here are of GDP. Over the twenty years since the CSG was created, income tax (white triangles) rates decline and loopholes increase, while CSG (black squares) rises to practically double, with the crossover in 1998.

Landais, Piketty and Saez consider that payroll contributions need to be considerably reduced, while the CSG should not be increased in compensation because non-progressive. They propose a complete makeover of the tax system in which the CSG would be merged with the income tax. The resulting new tax, pay-as-you-earn and made more progressive (higher rates on the upper brackets), should bring in higher revenue than the current CSG + income tax (~7.3% of GDP). François Hollande defended the merger idea in debate during the PS primaries, and the fiscal revolution proposal was seriously discussed with the Hollande presidential campaign. It was discarded. It would be for later on, in the "second mandate"...

Gallois report recommendations

Focussing exclusively on price competitiveness, Gallois proposes a "competitiveness shock" for French businesses by a reduction of €20bn in social contributions, with a €10bn reduction on the contributions paid by employees (total €30bn or 1.5% of GDP), preferably in one year, maximum two. To be offset by a CSG hike, some low-rate VAT rises, increased carbon tax and financial transaction taxes. To be clear, the proposal depends massively on the CSG rise (for €20-22bn of the total €30bn).

Government decisions

The government follows Gallois on the "competitiveness shock", but offsets it in a different way. French enterprises will receive €20bn in tax credit over three years (this is something like 30% of the company tax "take"). The €10bn for employees is shelved. The offset is to come, not from a CSG rise, but a VAT rise. In 2014, the main rate will go from 19.6% to 20%, the intermediate rate from 7% to 10%. The bottom rate, on food and vital necessities, will go down, from 5.5% to 5% (little gesture to make nice...). A further €10bn to be found by reduced government spending (presumably this is counted in Hollande's €12bn spending cuts per year).

"Social VAT"

Sarkozy's proposed increase of a couple of points of VAT to finance social security (and at the same time improve the trade balance by discouraging consumption, skewed in France towards imports), was opposed by Hollande during the campaign, and the measure was rescinded before application once he came into office. Hollande is now defending the idea, albeit in a watered-down form, in a move that is widely seen as a U-turn.

He gave up on the wide-ranging fiscal reform he not long ago defended, and has gone back on the "social VAT". Further, repeating the competitiveness mantra based on price competitiveness alone, and on labour costs alone as a price competitiveness variable. Add to this the espousal of the spending cuts agenda, and -- next on the programme -- negotiating labour market reforms with the unions.

The six months in which no one really knew what he was up to are over. Acceptance of German demands and a supply-side agenda. That will be François Hollande.